The liberalization of Indonesias downstream oil and gas sector has been under discussion for several years. In October 2001, the Indonesian legislature passed the much-anticipated Oil and Gas Law 22/2001 which limited Pertaminas monopoly on upstream oil development (which requires it to be included in all PSCs) by the end of 2003. Also, Pertaminas regulatory and administrative functions were transfered to other entities, while its regulatory role was spun off to a new body, BP Migas. Legal changes adopted in 2005 have allowed for the extension of contracts beyond the previous 20-year limit, which helped to facilitate the deal with ExxonMobil for the development of the Cepu fields.
Pertamina maintained its retail and distribution monopoly for petroleum products until July 2004, when the first licenses for a foreign firm to retail petroleum products are due to be awarded to BP and Petronas of Malaysia. The government is still promising to open the sector to full competition, although progress has been very slow to date. Political interests with ties to Pertamina are likely reluctant to see the state-run firm lose its assured revenue streams. Pertamina itself was changed to a limited liability company by presidential decree in 2003, and is slated to be fully privatized by 2006.
Indonesias Ministry of Mines and Energy has taken over the function, formerly carried out by Pertamina, of awarding and supervising PSCs with foreign oil companies. Foreign firms also are to be freed from some of the regulatory approval requirements which they argue hinder their efficiency. One concern foreign oil companies have with the new law is the granting of a limited authority to regional governments to tax oil companies profits.
Indonesia historically has maintained very large consumption subsidies for domestic retail fuel consumers, with products being sold at a steep discount from world market prices. After a series of modest increases in petroleum prices over the past two years, the new Indonesian government of President Yudhoyono announced a sharp rollback of subsidies in September 2005. This more than doubled the retail price of gasoline and diesel. The subsidy reduction is likely to temper the rapid increases in petroleum product demand seen in recent years in Indonesia.
Indonesia has seven refineries, with a combined capacity of 992,745 bbl/d. The largest refineries are the 348,000-bbl/d Cilacap in Central Java, the 240,920-bbl/d Balikpapan in Kalimantan, and the 125,000-bbl/d Balongan, in Java.
PT Kilang Minyak Intan Nusantara, a joint venture of Al-Banader International Group of Saudi Arabia (40%), China National Electrical Equipment Corporation (40%) and PT Intanjaya Agromegah Abadi (20%), are planning to invest a total of $3 billion to build a refinery at Pare-Pare, South Sulawesi. It would be export oriented, taking Saudi crude and refining it for sale primarily to the Chinese market. Iran also has been discussing the possibility of financing an export-oriented refinery in Indonesia, which would process Iranian heavy crudes for export into Asian markets.
Pertamina has decided to resume construction of the partly built petrochemical facility in Tuban, East Java. The project has been stalled since 1998, but a joint venture was established in September 2005 between Pertamina and Sinopec of China to conduct a feasibility study on completing the plant.